Auditors’ annual report on transparency to be public
1 min read . Updated: 02 Apr 2023, 11:20 PM IST
PremiumIndia's National Financial Reporting Authority (NFRA) is proposing that all stakeholders, including regulators, investors and the public, be given access to the transparency report that auditors must produce annually. The report will contain details of auditors' operations, quality control systems and network relationships. The NFRA is also proposing that auditors disclose legal, ownership and governance structures, as well as network and licensing arrangements with other firms. The new requirements will be introduced in phases, beginning with large firms.
New Delhi: The mandatory annual transparency report that auditors will have to prepare under a new regulatory requirement proposed by National Financial Reporting Authority (NFRA) will be accessible by all stakeholders, and not be limited to the audit watchdog’s consumption, a person aware of the matter said.
The transparency report, which will have finer details about auditors’ operations, quality control systems and network relationship with other consultancies will be accessible to other regulators, business community, investors, researchers and the public at large, the person said, seeking anonymity.
NFRA is in the process of mandating auditors to disclose their legal, ownership, management and governance structures, and network and licensing arrangements with other firms, besides details such as the dealings with audit clients, including the fees received. That apart, they must also disclose the break-up of audit and non-audit fees from both audit clients and others.
“At present, information on an audit firm’s operational details are not available in the public domain, and making the annual transparency report public will benefit stakeholders," he said.
The information will help businesses to make informed decisions on choosing their statutory auditor, the person added. NFRA plans to introduce the new requirements in phases, starting with large firms.
Existing rules do not require the audit firms to reveal details on business models, clientele and network relationship with other firms. The opacity has been a bone of contention between the audit industry and NFRA, he said.
An email query to NFRA on Friday seeking comments remained unanswered till press time.
Experts said the benefits of an annual transparency report are two-fold. Consistent with the changing dynamics of modern business, audit companies are increasing their resources and capabilities to deliver quality audit and non-audit services and the annual transparency report will help the firms to showcase the same to the world at large, said Ashok Haldia, former secretary of accounting rule-maker Institute of Chartered Accountants of India (ICAI).
“Bringing transparency is certainly an advantage. Equally important is that when an audit firm has to disclose on quality control system, governance systems and competencies, it would cause them to institutionalize quality and build a culture of quality within the firm, and be accountable for it. The requirement of transparency report for auditors of top 1,000 listed entities is a welcome initiative. However, quality is linked to the commensurate level of audit fee and all the stakeholders need to focus on that as well," said Haldia.
Disclosing other entities in a audit company’s network is a major transparency requirement for the audit regulator. In the past, NFRA had examined the audit quality of entities in the Infrastructure Leasing and Financial Services group, and held some auditor engagements as void as the regulator felt that the other firms in the auditor’s alleged network had rendered certain allegedly impermissible non-audit services.